Financial Statements and Notes in an Annual Report

After the glossy and polished pages of the front sections of the annual report have been perused, the meat of the annual report is really comprised of its financial statements. Although the letter from the company’s president is informative, it is the figures of the financial statements which disclose the true state of the company’s finances.

At the very minimum, an annual report always consists of a balance sheet, income statement, statement of cash flows, the notes, report of Management Responsibilities and auditor’s opinion. The notes could be viewed as afterthoughts. However, they can be as valuable as the financial statements themselves.

The Notes

This section includes various information such as accounting methods used, noncurrent liabilities and their due dates, commitments, inventory components, employee pension provisions and many other financial disclosures.

Report of Management Responsibilities

This section is management’s opportunity to offer proof and assurance that it’s reports are true. There is a short discussion of controls the management uses to ensure accuracy. It is management who is primarily responsible for the precision and thoroughness of the information presented.

Auditor’s Opinion

This section gives the auditor’s opinion of the financial statements prepared by management. It is a short report addressed to the company’s shareholders. An unqualified opinion is a good sign and should be reassuring to investors. However, qualified opinions indicate possible instability. If the phrase “except for”  appears, this should serve as a red flag to investors.

In addition to these components, an annual report may also include the following:

  • A summary of quarterly figures for the current and previous year
  • Financial reporting and changing prices
  • Reporting by divisions or other principal departments of the business
  • Five-year summary of operations